Heads are rolling at both KPMG and the Public Company Accounting Oversight Board over an information leak that gave KPMG auditors some advance warning around which of the firm’s audits had been selected for an upcoming inspection.

KPMG says it discovered the leak, informed the PCAOB and the Securities and Exchange Commission, and terminated six individuals, including the head of the audit practice, Scott Marcello. He has been replaced by Frank Casal. Also new at KPMG as a result of the shakeup is Jackie Daylor as national managing partner for audit quality and professional practice. That position has been held until recently by David Middendorf. The PCAOB also dismissed one unnamed employee.

KPMG says it dismissed five partners and one audit employee when it learned in late February from an internal source that someone who had recently joined the firm from a position at the PCAOB shared information with other KPMG personnel in advance of PCAOB inspections about which audits that had been selected for inspection.

The PCAOB selects audits for inspection based on where it most expects to find errors, and selection is not announced in advance to firms. If KPMG audit leadership knew in advance which audits would be inspected, that presumably created an opportunity for auditors to double check their work papers before inspectors would arrive and begin their work. That's an edge KPMG could use, based on the results of its 2015 inspections. KPMG's deficiency rate for that year was 38 percent, the highest of the Big 4 firms.

KPMG says the internal employee received the information from someone who was employed at the PCAOB. The PCAOB says when it learned recently that a “registered firm” had come to possess “confidential PCAOB inspection selection information,” the board launched an internal investigation. “The investigation identified inappropriate disclosures by an employee, and the employee is no longer with the PCAOB,” the PCAOB said in a prepared statement.

KPMG says it reported the situation to the PCAOB and SEC after learning of it and retained outside counsel to investigate. That investigation revealed six individuals at KPMG either had improper advance warning of engagements to be inspected by the PCAOB or were aware that others had received such information and failed to report it.

“KPMG has zero-tolerance for such unethical behavior,” said Lynne Doughtie, chairman and CEO at KPMG, in a statement. “KPMG is committed to the highest standards of professionalism, integrity and quality, and we are dedicated to the capital markets we serve.” The firm says it is taking additional steps internally to head off any recurrence in the future, although it did not explain what those steps include.

The PCAOB also says it is taking steps internally “to maintain and reinforce the integrity of its inspection process.” The board provided no detail on what that might entail. “The PCAOB takes the integrity of its oversight processes very seriously,” the board said.

Neither KPMG or the PCAOB would say whether the information leak was discovered before or after inspections occurred, or whether the PCAOB altered its inspection plan or performed new inspections as a result of the discovery. That raises questions about whether KPMG might have had an unfair advantage over the other firms when the 2017 inspection results are published.

It’s also not clear whether the PCAOB may have launched any disciplinary proceedings. By statute, such actions are confidential until fully settled.

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